Essay about Trends In Australian Bank Capital

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LETTER OF TRANSMITTAL

This report's topic is Trends in Australian Bank Capital. The content is as following:
1. The explanation of why "Regulators usually want more equity capital whereas shareholders usually favour less equity capital"
2. The differences between bank equity capital and bank regulatory capital
3. A discussion of the functions of bank capital and the role of the risk-return trade-off
4. The differences between tier 1 and tier 2 capital
5. The components of tier 1 and tier 2 capital and the cost and risk implications of them
6. Details of the trends in the four major Australian banks for the last five years.

1.
In Hogan et al (2004) Page 249 states that ¡§from the shareholders¡¦ point of view, the appropriate
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These requirements define what is acceptable as capital and provide for standard methods of measuring the risks incurred by the Bank. APRA has set minimum ratios that compare the regulatory capital with risk weighted on and off balance sheet assets. The minimum risk-weighted capital ratio is 8%. The following formula is used to calculate the risk-weighted capital ratio:
Risk-weighted capital ratio = Qualifying capital . Total risk-weighted assets

The numerator of the ratio is qualifying capital, which includes Tier 1 capital such as paid-up ordinary shares and retained profits, and Tier 2 capital such as term subordinated debt after making required deductions for items such as goodwill and equity holdings in other banks.
Equity capital is a permanent commitment of funds which earns the residual income of the firm after all interest and other costs have been paid. In Orgler/ Wolkowitz Bank Capital 1976, bank equity capital represents ¡§all claims on the bank¡¦s profits, and in the Report of Condition it is divided into several accounts that include preferred stock, common stock, surplus, undivided profits, and reserves for contingencies and other capital reserves¡¨. Whereas regulatory bank capital is bank funding which qualifies as bank regulatory capital under the
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